“A currency crisis in the currency reserve can have global consequences. I’m surprised we haven’t heard anything from the IMF.”“
Larry Summers, former US Treasury Secretary
Former US Treasury Secretary Larry Summers is concerned that Britain’s new Prime Minister Liz Truss may risk triggering a global crisis if the government does not take steps to stem the bleeding in local government bonds and the pound.
Since the pound is considered a global reserve currency, Summers said in a series of tweets on Tuesday that the UK’s balance of payments crisis could reverberate beyond Britain’s borders.
In light of the growing risks of the crisis, Summers said he was “surprised” that the IMF had not yet participated.
Summers said last week that he wouldn’t be surprised to see the pound fall all the way until the US dollar and the euro par EURUSD,
But he said on Tuesday that the pace of the British currency’s decline over the past two days had surprised him.
The pound fell along with British government bonds as international markets backed away from the Truss government’s proposed mini-budget, which included both tax cuts and billions of pounds in energy subsidies to help British families struggling to pay heating bills in the face of the worst of inflation. in recent memory.
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Summers criticized the budget as “completely irresponsible” and said that “the strong tendency for long interest rates to rise with a depreciating currency is a hallmark of discredited cases.”
With the UK’s trade deficit rising due to rising energy costs, this combination of pound weakness combined with rising yields could lead to a vicious cycle, Summers said.
Summers added that he “wouldn’t be surprised” to see yields on short-term credits triple over the next two years, eventually reaching more than 7%.
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London’s standing as a global financial center is likely to be damaged in the process.
The pound rebounded on Tuesday as the dollar fell after hitting a 20-year high. But the British currency is still attracting only $1.08, just above its lowest level since the 1980s.
Meanwhile, UK bond yields continued to climb, with the 10-year gilded TMBMKGB-10Y,
The yield was 4.373%, while the two-year gilded yield was TMBMKGB-02Y,
It fell to 4.441%.
British stocks were on track to end a slight rally on Tuesday after the FTSE 100 UKX Index,
The UK’s benchmark stock index hit its lowest closing level since June on Friday.